FACTS:
A LLC (USA) no PE in India enters
into an agreement with B LTD (India) the effect of which, royalty income will
be generated in the hands of A INC in consideration of services provided to B
LTD.
A INC follows cash basis whereas
B Ltd follows accrual basis of accounting. During FY 2014-15 A raised invoices
for USD 10 million out of which USD 7.86 million were paid by B Ltd during the
same FY however as per mercantile system of accounting and out of abundant
caution TDS is deducted by B Ltd on entire USD 10 million.
QUERY:
1.
The fact that since A LLC follows cash basis of
accounting can it offer for taxation in India only USD 7.86 million ?
2.
How much of tax credit can be claimed?
OPINION
Issue 1
As per Sec 90(2) “Where the Central Government has entered into an
agreement with the Government of any country outside India or specified
territory outside India, as the case may be, under sub-section (1) for granting
relief of tax, or as the case may be, avoidance of double taxation, then, in
relation to the assessee to whom such agreement applies, the provisions of this
Act shall apply to the extent they are more beneficial to that assesse”.
The beneficial provisions are not
only to be understood from the point view of lesser rate of tax but also to
determine the taxability of income as well.
In INDIA-USA DTAA, Article 12
deals with taxability of royalty & fees for technical services
1. Royalties and fees for included services arising in a Contracting
State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services may also be
taxed in the Contracting State in which they arise and according to the laws of
that State; but if the beneficial owner of the royalties or fees for included
services is a resident of the other Contracting State, the tax so charged shall
not exceed :
(a) in the case of royalties
referred to in sub-paragraph (a) of paragraph 3 and fees for included services
as defined in this Article [other than services described in sub-paragraph (b) of
this paragraph] :
(i) during the first five
taxable years for which this Convention has effect,
(a) 15 per cent of the gross
amount of the royalties or fees for included services as defined in this
Article, where the payer of the royalties or fees is the Government of that
Contracting State, a political sub-division or a public sector company ; and
(b) 20 per cent of the gross
amount of the royalties or fees for included services in all other cases ; and
(ii) during the subsequent
years, 15 per cent of the gross amount of royalties or fees for included
services ; and
(b) in the case of royalties
referred to in sub-paragraph (b) of paragraph 3 and fees for included services
as defined in this Article that are ancillary and subsidiary to the enjoyment
of the property for which payment is received under paragraph 3(b) of this
Article, 10 per cent of the gross amount of the royalties or fees for included
services.
3. The term "royalties" as used in this Article means :
(a) payments of any kind received as a
consideration for the use of, or the right to use, any copyright of a literary,
artistic, or scientific work, including cinematograph films or work on film,
tape or other means of reproduction for use in connection with radio or
television broadcasting, any patent, trade mark, design or model, plan, secret
formula or process, or for information concerning industrial, commercial or
scientific experience, including gains derived from the alienation of any such
right or property which are contingent on the productivity, use, or disposition
thereof ; and
(b) payments of any kind received as
consideration for the use of, or the right to use, any industrial, commercial,
or scientific equipment, other than payments derived by an enterprise described
in paragraph 1 of Article 8 (Shipping and Air Transport) from activities
described in paragraph 2(c) or 3 of Article 8.
In Article 12(1) phrase used was
“paid to a resident of other contracting state” further definition of royalties
also means “payment of any kind received”. Since the phrases used in the DTAA
is ‘paid’ or ‘received’, therefore one can say that as per INDIA-USA DTAA
royalty income is taxable on receipt basis and hence non-resident recipient
with no PE in India can offer royalty for taxation in INDIA on receipt basis.
Issue 2
As per rule 37BA of Income tax
rules, “Credit for tax deducted at source
and paid to the Central Government, shall be given for the assessment year for
which such income is assessable”. Hence TDS credit corresponding to
the income offer for taxation can be claimed, however balance tds credit can be
carried forward to future years.
Disclaimer: The view expressed above is those of the contributors and
posted here for knowledge sharing purpose without any commercial aspect.
Professional opinion must be sought before entering into any similar
transactions. The contributor shall not be held liable for loss of any
kind arising from the exercise of information contained in it.
